Internal transfer pricing and profitability

In October, the Authority decided to amend the Electricity Industry Participation Code 2010 (Code) to require the disclosure of mass market internal transfer price (ITP) information by large integrated generator retailers and retail gross margin reports by certain retailers.

The Code amendment, available in the decision paper, will come into force on 30 November 2021.

Disclosing participants will be required to provide the Authority with ITP information and/or retail gross margin reports by no later than 90 days after the end of their financial year. This information must be disclosed to the Authority on its Information Provision Portal. The Authority will advise participants on how to disclose the required information at a later date.

The Authority intends to publish the disclosed ITP information and information received in the retail gross margin reports and is developing a benchmarking tool which allows users to compare the internal transfer prices of the disclosing participants to a series of benchmarks. This tool facilitates the interpretation of the ITP information and the methodologies used to derive it. This tool will be made available on the Authority’s website at a later date.

The Authority is mandating the annual disclosure of mass market internal transfer prices by integrated generator retailers, the methodology used to derive them and the disclosure of retail gross margin reports by retailers.

This decision addresses the Electricity Price Review recommendation for the Authority to enhance reporting on retail and generation profitability.

In light of the work and consideration still to be undertaken on the information gathering framework project, the Authority has decided to sequence the decision on how this proposal will be implemented (whether through the Code Amendment in the decision paper or under the proposed information gathering framework) at a time when the information gathering framework is being considered – currently planned for October 2021.

In either case there will not be a material impact on the information that will be disclosed or the timings for its disclosure.

Participants will still be required to provide the Authority with ITP information and/or retail gross margin reports by no later than 90 days after the end of their financial year.

The Authority will provide further information on how this proposal will be implemented once a decision has been made on the information gathering framework. 

This decision addresses the Electricity Price Review recommendation for the Authority to enhance reporting on retail and generation profitability.

The Authority has reviewed the methodologies that the five largest generator-retailers use to derive their internal transfer prices, which determine the profit allocated between the generation and retailing parts of their businesses. The Authority has also examined the profitability measures that generator-retailers publish for their retailing and generation operations. This review is part of a wider body of work to promote confidence in the wholesale market. The review also addresses a recommendation of the Electricity Price Review to enhance reporting on retail and generation profitability.

In most cases, the Authority found that the internal transfer prices of the generator-retailers were referenced to historic ASX futures prices. However, the internal transfer prices reported by the five generator-retailers vary significantly, reflecting different methodological choices. The Authority found there is limited public disclosure of these methodologies and considers that improving disclosure may foster public understanding and confidence in these prices.

The Authority will release a consultation paper in the new year on a proposed Code amendment to enhance disclosure of transfer prices and methodologies. The consultation paper will seek feedback on whether disclosure of some measure of retail electricity profitability would also be valuable. 

The Authority intends to release the consultation paper in March 2021. 

We sent letters to the five largest vertically integrated generator-retailers asking them to voluntarily provide information on their internal transfer pricing.